What is risk-based pricing?
Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.
This means, for example, that lenders will generally offer a higher interest rate to you if they view you as a higher risk borrower - say, because you recently declared bankruptcy, lost a job, or are several payments behind on a mortgage. For the same exact loan, lenders will generally offer a lower interest rate if they view you as a lower risk - say, because you have a good credit score and are employed.
Each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors.
If a lender relied on a credit report in making a lending decision about you, you should get a Risk-Based Pricing notice if you receive less favorable terms than other borrowers with better credit histories. This notice includes information about how to get your free annual credit report, your credit score, the score range, and the negative factors affecting the score.
Lenders may NOT use certain legally prohibited factors to come up with their risk-based pricing. The Equal Credit Opportunity Act makes it illegal for a creditor such as a lender or dealer to discriminate in any credit transaction, including auto loans, against any applicant because of:
- National origin
- Sex (Gender)
- Marital status
- Age (if the applicant is old enough to enter into a contract)
- Receipt of income from any public assistance program
- Exercising in good faith a right under the Consumer Credit Protection Act, which includes consumer protection statutes relating to credit
This means that a lender or dealer may not use any of the above grounds as a reason to:
- Refuse you an auto loan
- Discourage you from applying for an auto loan
- Provide you an auto loan on terms that are different from the terms given to someone else who is similarly situated to you, such as having similar creditworthiness
If you believe that you were discriminated against on any of these grounds, you can file an official complaint online or by calling us toll-free at 1-855-411-CFPB (2372) - or tell us about your experience without filing a complaint.
If you believe that your lender or dealer discriminated against you on one of these bases when you sought an auto loan, in addition to filing a complaint with the CFPB, you should also file a complaint with the Federal Trade Commission (FTC), as the CFPB does not have jurisdiction over all auto dealers.
State or local law may prohibit discrimination on additional grounds.